Why you should worry about U.S. inflation (not deflation)

FORTUNE — Believe it or not, commodity prices are breaking out right now as other inflationary pressures continue to build. Don’t believe it? Take a look at gold prices. They have already risen over 7% year-to-date as the S&P 500 SPX has fallen 1.5%. Meanwhile, the CRB Commodity Index is up 4% year-to-date.

Something is stirring here, and it doesn’t have the whiff of deflation.

If U.S. Federal Reserve Chair Janet Yellen decides to “rescue” equity markets by reversing the central bank’s plans to scale down its bond purchases, the impact could knock down the U.S. Dollar and trigger investors to chase yield, which would drive up inflation hedge assets and likely spark another round of growth-slowing commodity inflation.

After peaking in 2011-2012, commodity prices cratered in 2013. Because of last year’s price declines, period-to-period comparisons are especially sensitive, so even a moderate commodity price increase looks inflationary year over year. This is an optical effect, not yet an economic reality. But policy — and market panics — are made in response to how things appear, not how things actually are.

Hedgeye CEO Keith McCullough says we are unlikely to see 2011-2012 style actual inflation (which the Fed did not see at the time). But, as people perceive the rise in commodity prices alongside decelerating growth and declining stock prices, there will be speculation that the Fed will again loosen policy to support flagging growth. If Yellen reverses plans to scale down the Fed’s bond purchases, a process dubbed, “tapering,” your stocks will lift temporarily. But globally the dollar will suffer, causing inflation to rise faster.

Wage inflation was rising at the margin even before President Obama ordered wage increases. Savings rates are declining toward historic lows as consumption is again displacing savings. During the third quarter of 2013, aggregate household debt growth turned positive for the first time in 18 calendar quarters. After five years of household deleveraging, credit-driven consumption growth is back, and consumer overspending could spike if consumers start to worry about inflation as consumers chase rising prices.

Inflation is likely to lead to stock market multiple compression, the very opposite of what most Wall Street strategists are calling for. Last year saw both growth and inflation accelerating, leading optimistic investors to assign higher price-to-earnings ratio multiples to stocks and driving prices higher. Now commodity inflation is rising, but U.S. growth is showing signs of slowing. This is not a good place to be, and not an easy one to work out of, and no politician wants to hear that the best policy option is to sit tight and wait it out. This increases the risk of new tinkering by the Fed.

Thanks to over-optimistic Wall Street projections, investors are not positioned for slower growth and stock price multiple compression. McCullough says commodity prices seem to be front-running Fed policy — an “inflation trade” that could explode if Yellen reverses the taper. Broad measures of inflation, such as CRB prices, continue to make higher lows as stock prices decline.

Hedgeye’s macro analysis finds the rate of change in prices continues its upward trend, making the inflationary scenario worse for investors. The Prices Paid component is up in the ISM Manufacturing and ISM Services Surveys. Durable goods orders, retail sales, consumer trends, housing demand, and home prices are all slowing, and the U.S. Treasury’s yield spread is compressing, indicating a worsening growth outlook. SM services new orders — the best lead indicator of future activity in the survey — are back down to the level they were in July 2009, and ISM manufacturing new orders just had their biggest month-over-month decline since December 1980, the eve of a recession that battered the nation for two years.

Central planners and regulators are busy assuring their citizens that things are under control, but the reality is that regulators don’t know what forces will cause the next crisis. In fact, we may already be in the midst of the next crisis, spurred by central bankers trashing their currencies to stoke price inflation and stimulate exports — with notable standouts (so far) India and the U.K. The lasting impact of these policies is not economic strength, but greater inequality, with an increasing likelihood of social unrest and a possible collapse across emerging markets, for which the U.S. is not prepared.

In this limited options scenario, McCullough hopes for an unequivocal statement from Yellen that the Fed will continue to taper and continue to tighten. That would strengthen the dollar and help set the U.S. economy back on a stronger growth track.